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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
___________
Commission File Number 000-32855
___________
TORCH OFFSHORE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-2982117
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
401 Whitney Avenue, Suite 400
Gretna, Louisiana 70056-2596
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(504) 367-7030
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated
filer as defined in Rule 12b-2 of the Securities Exchange Act of
1934. Yes [ ] No [x]
The number of shares of the registrant's common stock outstanding
as of May 9, 2003 was 12,635,030, par value $0.01 per share.
TORCH OFFSHORE, INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 19
Certifications 19
Exhibit Index 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
--------- ---------
(Unaudited) (see Note 1)
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 800 $ 327
Accounts receivable --
Trade, less allowance for doubtful
accounts 17,443 25,226
Other 40 37
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,288 2,036
Prepaid expenses and other 3,461 3,747
--------- ---------
Total current assets 24,032 31,373
PROPERTY AND EQUIPMENT, at cost,
less accumulated depreciation 85,430 67,561
DEFERRED DRYDOCKING CHARGES, at cost,
less accumulated amortization 2,209 2,831
OTHER ASSETS 1,390 139
--------- ---------
Total assets $ 113,061 $ 101,904
========= =========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable -- trade $ 4,803 $ 7,677
Accrued expenses 3,108 3,696
Accrued payroll and related taxes 1,306 857
Financed insurance premiums 1,884 2,553
Deferred income taxes 287 287
Current portion of long-term debt 2,721 14
Receivable line of credit -- 4,271
--------- ---------
Total current liabilities 14,109 19,355
DEFERRED INCOME TAXES 2,672 2,636
LONG-TERM DEBT, less current portion 16,318 46
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY 79,962 79,867
--------- ---------
Total liabilities and
stockholders' equity $ 113,061 $ 101,904
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
Three Months
Ended March 31,
--------------------
2003 2002
---- ----
Revenues $ 17,029 $ 16,725
Cost of revenues:
Cost of sales 13,745 12,746
Depreciation and amortization 1,827 1,930
General and administrative
expenses 1,355 1,250
-------- --------
Total cost of revenues 16,927 15,926
-------- --------
Operating income 102 799
-------- --------
Other income (expense):
Interest expense -- (35)
Interest income 1 102
-------- --------
Total other income 1 67
-------- --------
Income before income taxes 103 866
Income tax expense (36) (303)
-------- --------
Net income attributable to
common stockholders $ 67 $ 563
======== ========
Net income per common share:
Basic $ 0.01 $ 0.04
======= ========
Diluted $ 0.01 $ 0.04
======= ========
Weighted average common stock
outstanding:
Basic 12,635 12,833
======= ========
Diluted 12,641 12,833
======= ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months
Ended March 31,
-----------------
2003 2002
---- ----
Cash flows provided by (used in)
operating activities:
Net income $ 67 $ 563
Depreciation and amortization 1,827 1,930
Deferred income tax provision 36 303
Deferred drydocking costs incurred -- (1,359)
(Increase) decrease in working capital:
Accounts receivable 7,780 (4,757)
Costs and estimated earnings in
excess of billings on
uncompleted contracts (252) 1,000
Prepaid expenses, net of financed
portion (383) (51)
Accounts payable - trade (2,874) 1,119
Accrued payroll and related taxes 449 611
Accrued expenses and other (559) 416
------- -------
Net cash provided by (used in)
operating activities 6,091 (225)
------- -------
Cash flows used in investing activities:
Purchases of property and equipment (9,345) (2,016)
------- -------
Net cash used in investing activities (9,345) (2,016)
------- -------
Cash flows provided by (used in)
financing activities:
Net payments on receivable line of
credit (4,271) --
Net proceeds from long-term debt 7,998 --
Treasury stock purchases -- (1,431)
------- -------
Net cash provided by (used in)
financing activities 3,727 (1,431)
------- -------
Net increase (decrease) in cash and
cash equivalents 473 (3,672)
Cash and cash equivalents at beginning
of period 327 24,493
------- -------
Cash and cash equivalents at end of
period $ 800 $20,821
======= =======
Interest paid (net of amounts
capitalized) $ -- $ 35
======= =======
Income taxes paid $ -- $ --
======= =======
Supplementary non-cash investing
activities:
Purchase of Midnight Wrangler $(9,731) $ --
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TORCH OFFSHORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation:
The interim condensed consolidated financial statements included
herein have been prepared by Torch Offshore, Inc. (a Delaware
corporation) and are unaudited, except for the balance sheet at
December 31, 2002, which has been prepared from the Company's
previously audited financial statements. The balance sheet at
December 31, 2002 has been derived from the audited financial
statements at that date but does not include all of the
information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. The condensed consolidated financial statements of
Torch Offshore, Inc. include its wholly-owned subsidiaries Torch
Offshore, L.L.C. and Torch Express L.L.C., (collectively, the
"Company"). Management believes that the unaudited interim
financial statements include all adjustments (such adjustments
consisting only of a normal recurring nature) necessary for fair
presentation. Certain information and note disclosures normally
included in annual financial statements prepared in accordance
with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to those rules and
regulations. The results for the three months ended March 31,
2003 are not necessarily indicative of the results to be expected
for the entire year. The interim financial statements included
herein should be read in conjunction with the audited financial
statements and notes thereto together with Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002. Certain prior period
amounts have been reclassified to conform to current period
presentation.
The Company provides integrated pipeline installation, subsea
construction and support services to the offshore oil and natural
gas industry, primarily in the United States Gulf of Mexico (the
"Gulf of Mexico"). The Company's focus has been providing
services primarily for oil and natural gas production in water
depths of 20 to 300 feet in the Gulf of Mexico (the "Shelf").
Over the past few years, the Company has expanded its operations,
fleet capabilities and management expertise in order to enable it
to provide deeper water services analogous to those services it
provides on the Shelf.
In June 2001, the Company completed its initial public offering
(the "Public Offering") of 5.0 million shares of its common stock
at $16.00 per share, raising gross proceeds of $80.0 million; net
proceeds were $72.6 million after underwriting commission and
discounts and expenses totaling $7.4 million.
2. Stockholders' Equity:
Treasury Stock - In August 2001, the Company's Board of Directors
approved the repurchase of up to $5.0 million of the Company's
outstanding common stock. Purchases are made on a discretionary
basis in the open market or otherwise over a period of time as
determined by management, subject to market conditions,
applicable legal requirements and other factors. As of March 31,
2003, 709,868 shares had been repurchased at a total cost of $4.2
million.
Stock Option Plan - The Company has a long-term incentive plan
under which 3.0 million shares of the Company's common stock are
authorized to be granted to employees and affiliates. The awards
can be in the form of options, stock, phantom stock, performance-
based stock or stock appreciation rights. As of March 31, 2003,
stock options covering 360,161 shares of common stock with a
weighted average price of $11.87 per share, and 62,815 shares of
restricted stock, both vesting generally over five years, were
outstanding.
3. Earnings Per Share:
The Company follows Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." Basic earnings per share is
calculated by dividing income attributable to common stockholders
by the weighted-average number of common shares outstanding for
the applicable period, without adjustment for potential common
shares outstanding in the form of options, warrants, convertible
securities or contingent stock agreements. For calculation of
diluted earnings per share, the number of common shares
outstanding are increased (if deemed dilutive) by the number of
additional common shares that would have been outstanding if the
dilutive potential common shares had been issued, determined
using the treasury stock method where appropriate.
Common stock equivalents (related to stock options) excluded from
the calculation of diluted earnings per share, because they were
anti-dilutive, were approximately 350,000 shares and 229,000
shares for the first quarters of 2003 and 2002, respectively.
4. Stock-Based Compensation:
The Company accounts for its stock-based compensation in relation
to the 2001 Long-Term Incentive Plan in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." However, SFAS No. 123, "Accounting
for Stock-Based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An
Amendment of SFAS No. 123", permit the intrinsic value-based
method prescribed by APB No. 25, but require additional
disclosures, including pro forma calculations of earnings and net
earnings per share as if the fair-value method of accounting
prescribed by SFAS No. 123 had been applied. If compensation
expense had been determined using the fair-value method in SFAS
No. 123, the Company's net income and earnings per share would
have been as shown in the pro forma amounts below:
Three Months
Ended
(in thousands, except per share data) March 31,
- -------------------------------------------------------------
2003 2002
---- ----
Net income (loss) attributable to common
stockholders:
As reported $ 67 $ 563
Pro forma $ (21) $ 494
Basic earnings (loss) per share:
As reported $ 0.01 $ 0.04
Pro forma $(0.00) $ 0.04
Diluted earnings (loss) per share:
As reported $ 0.01 $ 0.04
Pro forma $(0.00) $ 0.04
Stock-based employee compensation cost, net of
tax, included in net income as reported $ 47 $ 26
Stock-based employee compensation cost, net of
tax, that would have been included in net
income if the fair value-based method had
been applied $ 135 $ 95
5. Debt:
In July 2002, the Company entered into a $35.0 million bank
facility (the "Bank Facility") consisting of a $25.0 million
asset-based five-year revolving credit facility and a $10.0
million accounts receivable-based working capital facility with
Regions Bank. The interest on the Bank Facility is the London
Interbank Offered Rate (LIBOR) plus a range of 1.75% to 2.25%,
depending on the level of the consolidated leverage ratio (as
defined) measured on a quarterly basis. Borrowings under the Bank
Facility are secured by first preferred ship mortgage liens on a
portion of the Company's fleet and a pledge of the Company's
accounts receivable. Amounts outstanding under the accounts
receivable-based working capital facility may not exceed 85% of
eligible trade accounts receivable. Under the terms of the Bank
Facility, the Company must maintain tangible net worth of at
least $60.0 million, a minimum debt service coverage ratio of at
least 1.20 to 1, a consolidated leverage ratio of no more than
2.00 to 1 and a consolidated current ratio of at least 1.30 to 1.
The Company had no borrowings under the $10.0 million accounts
receivable-based working capital facility as of March 31, 2003.
In addition, the Company issued a $1.5 million standby letter of
credit as security for the charter payments due under the charter
agreement for the Midnight Hunter against the $10.0 million
accounts receivable-based working capital facility and a $2.7
million standby letter of credit as security for payments related
to a crane to be constructed as part of the Midnight Express
conversion against the $25.0 million asset-based five-year
revolving credit facility.
In April 2003, the Company finalized a 15-month credit line to
finance the conversion of the Midnight Express (the "Finance
Facility"). The credit line will convert into a three-year term
loan facility upon completion of the conversion of the Midnight
Express. The Finance Facility commitment is equally provided by
Regions Bank and Export Development Canada (EDC) ($30.0 million
participation by each). As part of the terms and conditions of
the Finance Facility, Regions Bank restructured the $25.0 million
asset-based five-year revolving credit facility discussed above
and made this part of the Finance Facility. The Company continues
to have available the $10.0 million accounts receivable-based
working capital facility discussed above from Regions Bank. In
addition, the $2.7 million standby letter of credit as security
for payments related to a crane to be constructed as part of the
Midnight Express conversion was transferred to the Finance
Facility.
The interest rate for the construction financing is based upon
the consolidated leverage ratio of the Company and ranges from
LIBOR plus a spread of 3.00% to 3.50% based upon these levels.
The Company is providing collateral in the form of the Midnight
Express as well as a first preferred ship mortgage on the
Midnight Fox, Midnight Star, Midnight Dancer, Midnight Carrier,
Midnight Brave and Midnight Rider. The Company has to adhere to
various conditions including maintaining a tangible net worth of
at least $60.0 million, a minimum debt service coverage ratio of
at least 1.20 to 1, a consolidated leverage ratio of no more than
2.00 to 1 and a consolidated current ratio of 1.30 to 1. The
Company is not allowed to incur additional debt over $8.0 million
without consent from Regions Bank.
The term loan facility of the Finance Facility is a three-year
debt structure with a 10-year amortization payment schedule with
semi-annual payments. The pricing for this facility is 3.25% over
LIBOR. Regions Bank and EDC will require the Company to maintain
the same collateral and covenants as included in the construction
financing depicted above.
In December 2002, the Company entered into a purchase agreement
with Global Marine for the Midnight Wrangler at a cost of
approximately $10.8 million. The Company took delivery of the
vessel in March 2003. The purchase of the vessel was financed by
Global Marine over a five-year period with monthly payments,
including 7% per annum interest, of approximately $0.2 million
plus a $1.0 million payment at the purchase date in March 2003
and another $1.0 million payment at the end of the five-year
period.
In March 2003, the Company finalized a $9.25 million, seven-year
term loan with GE Commercial Equipment Financing (GE). The loan
is structured so that the Company received $8.0 million
immediately and GE retained $1.25 million as a security deposit.
The interest rate on the term loan is the 30-day commercial paper
rate plus 2.03% and includes prepayment penalties of 2% for the
first twelve months, 1% for the second twelve months and 0%
thereafter. The term loan is structured to have monthly payments
over seven years. The collateral for the loan is the Midnight
Eagle. The Company intends to utilize the proceeds from the loan
to fund the improvements to the Midnight Wrangler and a portion
of the Midnight Express conversion costs.
6. Commitments and Contingencies:
The Company has been named as a defendant in a stockholder class
action suit filed by purported stockholders regarding the Public
Offering. This lawsuit, Karl L. Kapps, et. al. v. Torch Offshore,
Inc. et. al., No. 02-00582, which seeks unspecified monetary
damages, was filed on March 1, 2002 in U.S. District Court for
the Eastern District of Louisiana. The lawsuit was dismissed on
December 19, 2002 for failure to state a claim upon which relief
could be granted. The plaintiff has appealed to the U.S. Court of
Appeals for the Fifth Circuit. The Company believes the
allegations in this lawsuit are without merit and intends to
continue to vigorously defend this lawsuit. Even so, an adverse
outcome in this class action litigation could have a material
adverse effect on the Company's financial condition or results of
operations.
The Company has been named as a defendant in a lawsuit (Bluffview
Capital, LP v. Torch Offshore, Inc., No. 2002-7662, filed in the
134th Judicial District Court, Dallas County, Texas on August 26,
2002) brought by a former service provider. The plaintiff was
originally hired to assist the Company in obtaining financing,
among other services. The Company terminated the relationship and
is disputing the plaintiff's interpretation of certain provisions
regarding the services to be provided and the calculation of fees
allegedly earned. The Company's management believes that it has
complied with all of the provisions of the contract and intends
to continue to vigorously defend its position in this matter.
Nevertheless, an adverse outcome in the litigation could have an
adverse effect on the Company's financial condition or results of
operations.
The Company terminated the charter of the Midnight Hunter on
January 24, 2003, as discussed below. The Company filed a lawsuit
(Torch Offshore, L.L.C. v. The M/V Midnight Hunter and Cable
Shipping, Inc., et al., No. 03-0343, filed in the United States
District Court, Eastern District of Louisiana on February 4,
2003) seeking an order, which was granted by the court, attaching
and arresting the Midnight Hunter as security for the Company's
claims related to such termination. A $1.5 million standby letter
of credit issued to secure the Company's payments under the
charter remains outstanding. The claims will be settled by
arbitration in London, England. The Company's management believes
the amount of the claim is justified and we intend to vigorously
pursue this matter. Nevertheless, an adverse outcome from the
litigation/arbitration could have an adverse effect on our
financial condition or results of operations.
In March 2003, the Company filed a lawsuit (Torch Offshore, Inc.
v. Newfield Exploration Company, No. 03-0735, filed in the United
States District Court, Eastern District of Louisiana on March 13,
2003) against Newfield Exploration Company (Newfield) claiming
damages of approximately $2.1 million related to work completed
for Newfield in the Gulf of Mexico at Grand Isle Block 103-A. The
lawsuit alleges that the Company did not receive all compensation
to which it was entitled pursuant to the contract. As of March
31, 2003, the Company has recorded an amount attributable to this
claim based upon the Company's contractual rights under its
agreement with Newfield. The Company intends to vigorously pursue
this matter, the ultimate resolution of which could materially
impact currently recorded amounts in the future.
Because of the nature of its business, the Company is subject to
various other claims. The Company has engaged legal counsel to
assist in defending all legal matters, and management intends to
vigorously defend all claims. The Company does not believe, based
on all available information, that the outcome of these matters
will have a material effect on its financial position or results
of operations.
In early 2000, the Company commenced a five-year new-build
charter for the Midnight Arrow, a DP-2 deepwater subsea
construction vessel. The long-term charter is with Adams Offshore
Ltd. and expires in March 2005. The charter amount includes the
marine crew, maintenance and repairs, drydock costs and certain
insurance coverages. Under the terms of the charter, the Company
has the exclusive option to purchase the vessel for $8.25 million
or the ability to extend the charter for an additional two years
at the end of the charter period. This charter is being accounted
for as an operating lease.
In May 2002, the Company entered into an agreement with Cable
Shipping, Inc. to time charter a vessel, the G. Murray, under a
three-year contract at a rate of $18,500 per day. The time
charter commenced in the third quarter of 2002 and the vessel was
renamed the Midnight Hunter. However, in January 2003, the
Company terminated the time charter because of the vessel's
failure to meet certain specifications outlined in the charter
agreement. The Company filed a lawsuit as discussed above.
The Company has executed contracts with several critical
equipment suppliers related to the conversion of the Midnight
Express. The remaining outstanding contracts aggregate $37.2
million, of which $8.4 million had been paid as of March 31,
2003. In the event the Company terminates these contracts, the
Company is required to pay certain of these suppliers' costs
incurred to date plus 10% while other suppliers are entitled to
the full value of the contract, depending upon the terms of the
relevant agreement. The Company believes its present termination
cost exposure on these contracts totals approximately $18.1
million. During April 2003, the Company entered into a contract
with Davie Maritime Inc. of Quebec, Canada to complete the
conversion of the Midnight Express at a contract value of $25.6
million ($37.0 million inclusive of assigned critical equipment
supplier contracts discussed earlier). In addition, the Company
has executed contracts with several suppliers for various
equipment to be used in connection with the installation of a
modular lay system on the Midnight Wrangler, as well as the
addition thereon of accommodations and other equipment. The
remaining outstanding contracts aggregate $1.7 million, of which
$0.9 million had been paid as of March 31, 2003, and the present
termination cost exposure on these contracts totals approximately
$0.8 million.
7. New Accounting Standards:
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for fiscal years beginning after June 15,
2002. This statement requires the Company to record the fair
value of liabilities related to future asset retirement
obligations in the period the obligation is incurred. The Company
adopted SFAS No. 143 on January 1, 2003, which did not impact its
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections," which revises current guidance with
respect to gains and losses on early extinguishment of debt.
Under SFAS No. 145, gains and losses on early extinguishment of
debt are not treated as extraordinary items unless they meet the
criteria for extraordinary treatment in APB No. 30. The Company
adopted SFAS No. 145 effective January 1, 2003, and as a result,
will be required to reclassify the extraordinary losses on early
extinguishment of debt from prior periods in future filings as
these amounts will no longer qualify for extraordinary treatment
under SFAS No. 145.
In December 2002, the FASB issued SFAS No. 148, which provides
alternative methods of transition for a voluntary change to the
fair-value based method of accounting for stock-based employee
compensation, and the new standard, which is now effective,
amends certain disclosure requirements. The Company continues to
apply APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock-based
compensation; therefore, the alternative methods of transition do
not apply. The Company has adopted the disclosure requirements of
SFAS No. 148 (see "Stock-Based Compensation" above).
In June 2001, the American Institute of Certified Public
Accountants (AICPA) issued an exposure draft of a proposed
Statement of Position (SOP), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. The proposed SOP is
still under consideration, and uncertainties currently exist with
respect to the ultimate timing of its release and its final
scope. The Company is assessing the impact of the change should
this SOP, or any portion of this SOP, be adopted and continues to
monitor the progress of this proposed standard. If the portion of
this SOP relating to planned major maintenance activities is
adopted, the Company would be required to expense regulatory
maintenance cost on its vessels as incurred (currently
capitalized and recognized as "drydocking cost amortization"),
and capitalized costs at the date of adoption would be charged to
operations as a cumulative effect of change in accounting
principle.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, and the unaudited
interim condensed consolidated financial statements and related
notes contained in "Item 1. Financial Statements" above.
This Quarterly Report on Form 10-Q contains statements that are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended, concerning, among
other things, our prospects, expected revenues, expenses and
profits, developments and business strategies for our operations,
all of which are subject to certain risks, uncertainties and
assumptions. Our actual results may differ materially from those
expressed or implied in this Form 10-Q. Many of these factors are
beyond our ability to control or predict. Accordingly, we caution
investors not to place undue reliance on forward-looking
statements. There is no assurance that our expectations will be
realized. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
our Annual Report on Form 10-K for the fiscal year ended December
31, 2002 under the captions "Forward-Looking Statements" and
"Item 1. Business - Risk Factors."
GENERAL
Torch Offshore, Inc. provides subsea construction services in
connection with the in-field development of offshore oil and
natural gas reservoirs. We are a leading service provider in our
market niche of installing and maintaining small diameter
flowlines and related infrastructure on the Continental Shelf of
the Gulf of Mexico (the "Shelf"). Over the last few years, we
have expanded our operations, fleet capabilities and management
expertise to enable us to provide deeper water services analogous
to the services we provide on the Shelf.
Since 1997, we have increased the size of our total fleet from
three to eleven construction and service vessels. In 2002, we
completed the acquisition of a 520-foot vessel from Smit
International. This vessel will be converted to a dynamically
positioned (DP-2) offshore construction vessel with our patented
pipelay system and renamed the Midnight Express. In December
2002, we committed to purchase a cable-lay vessel, renamed the
Midnight Wrangler, for the purpose of deepwater pipelay and
subsea construction. We took possession of this vessel in March
2003. This vessel will enter our active fleet during the second
quarter of 2003 after various modifications to the vessel are
made.
In addition, we purchased the Midnight Gator, a supply barge, in
September 2002. We are currently converting this piece of
equipment into a sand dredge and it will become available for use
in the second quarter of 2003 for the purpose of jetting trenches
for pipe burial in shallow waters.
In November 2002, we signed a contract to provide pipeline
installation support in the Boston, Massachusetts Harbor. The
contract commenced in the fourth quarter of 2002 and should last
for a period of five to six months from the date of commencement.
The contract calls for the Midnight Rider to work outside of Gulf
of Mexico waters for the duration of the contract. The contract
provides for the mobilization and demobilization of the vessel in
addition to the pipelay and burial work to be completed by the
Midnight Rider.
Factors Affecting Results of Operations
The demand for subsea construction services primarily depends
upon the prices of oil and natural gas. These prices reflect the
general condition of the industry and influence the willingness
of our customers to spend capital to develop oil and natural gas
reservoirs. We are unable to predict future oil and natural gas
prices or the level of offshore construction activity related to
the industry. In addition to the prices of oil and natural gas,
we use the following leading indicators, among others, to
forecast the demand for our services:
- - the offshore mobile and jack-up rig counts;
- - forecasts of capital expenditures by major and independent
oil and natural gas companies; and
- - recent lease sale activity levels.
Even when demand for subsea construction services is strong,
several factors may affect our profitability, including the
following:
- - competition;
- - equipment and labor productivity;
- - weather conditions;
- - contract estimating uncertainties;
- - global economic and political circumstances; and
- - other risks inherent in marine construction.
Although greatly influenced by overall market conditions, our
fleet-wide utilization is generally lower during the first half
of the year because of winter weather conditions in the Gulf of
Mexico. Accordingly, we endeavor to schedule our drydock
inspections and routine and preventative maintenance during this
period. Additionally, during the first quarter, a substantial
number of our customers finalize capital budgets and solicit bids
for construction projects. For this reason, individual
quarterly/interim results are not necessarily indicative of the
expected results for any given year.
In the life of an offshore field, capital is allocated to the
development of a well following a commercial discovery. The time
that elapses between a successfully drilled well and the
development phase, in which we participate, varies depending on
the water depth of the field. On the Shelf, demand for our
services generally follows drilling activities by three to twelve
months. We have noticed that demand for pipeline installation for
deepwater projects exceeding 1,000 feet of water depth generally
follows drilling activities by at least eighteen months to three
years. These deepwater installations typically require much more
engineering design work than Shelf installations.
RESULTS OF OPERATIONS
Comparison of the Quarter Ended March 31, 2003 to the Quarter
Ended March 31, 2002
Revenues. Revenues were $17.0 million for the three months ended
March 31, 2003 compared to $16.7 million for the three months
ended March 31, 2002, an increase of 1.8%. The increase in first
quarter 2003 revenues was caused by the increase in average
pricing realizations (revenues divided by revenue days) offset by
the overall decline in the utilization of our fleet during the
period. Average pricing realizations in the first quarter of 2003
were 12.6% higher than the average pricing realizations in the
first quarter of 2002. However, the number of revenue days worked
declined 9.6% between periods. Our fleet worked 490 revenue days
in the first quarter of 2003 resulting in a utilization rate of
61%, compared to 542 revenue days worked in the three months
ended March 31, 2002, or a 75% utilization rate. The Midnight
Runner, which is now commissioned to work only in State waters,
had no utilization in the first quarter of 2003 versus 76 revenue
days in the year ago quarter. Also contributing to the decrease
in utilization was the Midnight Star, which worked only 45
revenue days in the first quarter of 2003 as opposed to 82
revenue days in the year ago quarter. However, utilization of the
Midnight Eagle increased to 79 revenue days in the first quarter
of 2003 versus only 20 revenue days of utilization in the first
quarter of 2002.
Gross Profit. Gross profit (defined as revenues less cost of
sales) was $3.3 million (19.3% of revenues) for the three months
ended March 31, 2003, compared to $4.0 million (23.8% of
revenues) for the three months ended March 31, 2002. Cost of
sales consists of job related costs such as vessel wages,
insurance and repairs and maintenance. The decrease in the gross
profit margin was primarily caused by the decline in utilization
of our fleet as discussed above, higher wages, an increase in
insurance costs and higher repair and maintenance costs than in
the year-ago quarter. In addition, included in cost of sales were
$0.7 million of additional costs related to the termination of
the Midnight Hunter charter.
Depreciation and Amortization. Depreciation and amortization
expense was $1.8 million for the three months ended March 31,
2003 compared to $1.9 million for the three months ended March
31, 2002, a decrease of 5.3%. This minimal decrease was a result
of less amortization of drydock costs in the first quarter of
2003 as compared to the first quarter of 2002.
General and Administrative Expenses. General and administrative
expenses totaled $1.4 million (8.0% of revenues) for the three
months ended March 31, 2003 compared to $1.3 million (7.5% of
revenues) for the three months ended March 31, 2002. The first
quarter 2003 general and administrative expenses were higher due
to increases in legal expenses and franchise taxes offset
slightly by a decline in consulting fees.
Interest Income, Net. Net interest income was $1,000 for the
three months ended March 31, 2003 compared to net interest income
of $0.1 million for the three months ended March 31, 2002. The
decline in net interest income reflects the lower cash balances
in the first quarter of 2003 versus the year-ago period because
of the usage of cash related to the expansion of our fleet and
the purchase and conversion of the Midnight Express. We
capitalized all of our first quarter 2003 interest costs,
totaling $0.1 million, in relation to the conversion of the
Midnight Express.
Income Taxes. We recorded a $36,000 expense (a 35% effective tax
rate) during the three months ended March 31, 2003. We recorded a
$0.3 million expense (a 35% effective tax rate) during the three
months ended March 31, 2002.
Net Income Attributable to Common Stockholders. Net income to
common stockholders for the three months ended March 31, 2003 was
$0.1 million, compared with a net income to common stockholders
of $0.6 million for the three months ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, we completed an initial public offering (the
"Public Offering") of 5.0 million shares of our common stock for
gross proceeds of $80.0 million; net proceeds were $72.6 million
after underwriting commission and discounts and expenses. We
subsequently retired all debt, purchased and drydocked the
Midnight Rider, and initiated the detailed engineering for the
construction of the Midnight Warrior (discussed below). We also
used the proceeds from the Public Offering to purchase the
Midnight Express and commence the conversion of the vessel during
2002.
In the three months ended March 31, 2003, our operations provided
net cash of $6.1 million as compared to $0.2 million used in the
three months ended March 31, 2002. Investing activities resulted
in cash used for the purchase of equipment as discussed below.
Cash flow provided by financing activities was $3.7 million in
the first three months of 2003 and related to the proceeds from
long-term debt offset by payments on the receivable line of
credit. The first three months of 2002 resulted in cash used in
financing activities of $1.4 million related entirely to stock
repurchases. Working capital decreased from $12.0 million as of
December 31, 2002 to $9.9 million as of March 31, 2003 primarily
due to a decrease in accounts receivable-trade offset by a
decrease in current debt and accounts payable-trade.
Historically, our capital requirements have been primarily for
the acquisition and improvement of our vessels and other related
equipment. We expect that as we enter into the deepwater market
our capital requirements will continue to be primarily for the
conversion and improvement of our vessels. Capital expenditures
totaled $19.1 million for the three months ended March 31, 2003,
compared to $2.0 million for the three months ended March 31,
2002. Capital expenditures in the first three months of 2003
primarily relate to the deepwater expansion of our fleet. We
expect to fund our cash requirements for any future capital
investments from cash on hand, cash flow from operations and by
utilizing our bank and debt facilities. We currently estimate
capital expenditures for the remainder of 2003 to be
approximately $57.5 million, primarily representing the
construction of, and the equipment and support facilities
associated with, the Midnight Express. Included in this estimate
are approximately $3.1 million of improvements on the Midnight
Wrangler and approximately $0.3 million for routine capital and
drydock inspections of our vessels to be incurred over this
period.
In July 2002, we entered into a $35.0 million bank facility (the
"Bank Facility") with Regions Bank consisting of a $25.0 million
asset-based five-year revolving credit facility and a $10.0
million accounts receivable-based working capital facility. The
interest on the Bank Facility is the London Interbank Offered
Rate (LIBOR) plus a range of 1.75% to 2.25%, depending upon the
level of the consolidated leverage ratio (as defined) measured on
a quarterly basis. Borrowings under the Bank Facility are secured
by first preferred ship mortgage liens on a portion of our fleet
and a pledge of our accounts receivable. Amounts outstanding
under the accounts receivable-based working capital facility may
not exceed 85% of eligible trade accounts receivable. Under the
terms of the Bank Facility, we must maintain tangible net worth
of at least $60.0 million, a minimum debt service coverage ratio
of at least 1.20 to 1, a consolidated leverage ratio of no more
than 2.00 to 1 and a consolidated current ratio of at least 1.30
to 1. We had no borrowings under the $10.0 million accounts
receivable-based working capital facility as of March 31, 2003.
In addition, we issued a $1.5 million standby letter of credit as
security for the charter payments due under the charter agreement
for the Midnight Hunter against the $10.0 million accounts
receivable-based working capital facility and a $2.7 million
standby letter of credit as security for payments related to a
crane to be constructed as part of the Midnight Express
conversion against the $25.0 million asset-based five-year
revolving credit facility.
In April 2003, we finalized a 15-month credit line to finance the
conversion of the Midnight Express (the "Finance Facility"). The
credit line will convert into a three-year term loan facility
upon completion of the conversion of the Midnight Express. The
Finance Facility commitment is equally provided by Regions Bank
and Export Development Canada (EDC) ($30.0 million participation
by each). As part of the terms and conditions of the Finance
Facility, Regions Bank restructured the $25.0 million asset-based
five-year revolving credit facility discussed above and made this
part of the Finance Facility. We continue to have available to us
the $10.0 million accounts receivable-based working capital
facility discussed above from Regions Bank. In addition, the $2.7
million standby letter of credit as security for payments related
to a crane to be constructed as part of the Midnight Express
conversion was transferred to the Finance Facility.
The interest rate for the construction financing is based upon
our consolidated leverage ratio and ranges from LIBOR plus a
spread of 3.00% to 3.50% based upon these levels. We are
providing collateral in the form of the Midnight Express as well
as a first preferred ship mortgage on the Midnight Fox, Midnight
Star, Midnight Dancer, Midnight Carrier, Midnight Brave and
Midnight Rider. We have to adhere to various conditions including
maintaining tangible net worth of at least $60.0 million, a
minimum debt service coverage ratio of at least 1.20 to 1, a
consolidated leverage ratio of no more than 2.00 to 1 and a
consolidated current ratio of 1.30 to 1. We are not allowed to
incur additional debt over $8.0 million without consent from
Regions Bank.
The term loan facility of the Finance Facility is a three-year
debt structure with a 10-year amortization payment schedule with
semi-annual payments. The pricing for this facility is 3.25% over
LIBOR. Regions Bank and EDC will require us to maintain the same
collateral and covenants as included in the construction
financing depicted above.
In December 2002, we entered into a purchase agreement with
Global Marine Shipping Limited (Global Marine) for the purchase
of the Wave Alert, to be renamed the Midnight Wrangler, at a cost
of approximately $10.8 million. We took possession of the vessel
in March 2003. The purchase of the vessel was financed by Global
Marine over a five-year period with monthly payments, including
7% per annum interest, of approximately $0.2 million plus a $1.0
million payment at the purchase in March 2003 and another $1.0
million payment at the end of the five-year period.
In March 2003, we finalized a $9.25 million, seven-year term loan
with GE Commercial Equipment Financing (GE). The loan is
structured so that we received $8.0 million immediately and GE
retained $1.25 million as a security deposit. The interest rate
on the term loan is the 30-day commercial paper rate plus 2.03%
and includes prepayment penalties of 2% for the first twelve
months, 1% for the second twelve months and 0% thereafter. The
term loan is structured to have monthly payments over seven
years. The collateral for the loan is the Midnight Eagle. We
intend to utilize the proceeds from the loan to fund the
improvements to the Midnight Wrangler and a portion of the
Midnight Express conversion costs.
The following table presents our long-term contractual
obligations and the related amounts due, in total and by period,
as of March 31, 2003 (in thousands):
Payments Due by Period
------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
------- -------- ------- ----- -------
Long-Term Debt $19,039 $ 2,721 $ 9,140 $5,618 $1,560
Operating Leases 8,055 3,862 4,102 91 --
Unconditional Purchase
Obligations 5,126 5,126 -- -- --
Other Long-Term
Obligations 24,491 24,491 -- -- --
------- ------- ------ ------ -----
Total Contractual Cash
Obligations $56,711 $36,200 $13,242 $5,709 $1,560
======= ======= ======= ====== ======
The majority of the long-term debt obligation consists of the
term loan with GE and the financing of the purchase of the
Midnight Wrangler from Global Marine, both of which are discussed
above.
During the first three months of 2003, we made payments of
approximately $0.7 million for the operating lease obligation
relating to our deepwater technology vessel, the Midnight Arrow,
under a five-year charter agreement. We paid approximately $7.3
million during the first three months of 2003 in relation to the
purchase price and conversion of the Midnight Express bringing
our total as of March 31, 2003 to $26.8 million.
Included in the operating leases are the monthly payments for
certain facilities used in the normal course of operations.
However, the majority of the operating leases obligation relates
to our five-year charter agreement of the Midnight Arrow.
Included in unconditional purchase obligations and other long-
term obligations are the contracts with equipment suppliers
related to the conversion of the Midnight Express ($28.8 million)
as well as equipment purchases for the Midnight Wrangler ($0.8
million). Not included in these commitments is the $25.6 million
($37.0 million inclusive of assigned critical equipment supplier
contracts discussed earlier) shipyard conversion contract signed
with Davie Maritime Inc. of Quebec, Canada as it was finalized in
April 2003.
In August 2001, the Company's Board of Directors approved the
repurchase of up to $5.0 million of our outstanding common stock.
Purchases are made on a discretionary basis in the open market or
otherwise over a period of time as determined by management,
subject to market conditions, applicable legal requirements and
other factors. During 2003, no shares were repurchased. There has
been no repurchase of our common stock since August 2002 and
under current conditions and to support our vessel expansion
strategy we do not expect to repurchase shares in the near
future. As of May 9, 2003, 709,868 shares had been repurchased at
a total cost of $4.2 million.
Consistent with the focus toward investing in new technology,
including deepwater capable assets such as the Midnight Express
and the Midnight Wrangler, four of the last five vessels added to
our operations have been DP-2 deepwater capable (Midnight Eagle,
Midnight Arrow, Midnight Express and Midnight Wrangler). Through
March 31, 2003, we have expended approximately $71.8 million (in
combined capital expenditures, operating lease payments and
purchase payments) for these vessels, with an additional
estimated $69.8 million to be incurred in associated construction
costs, operating lease payments and drydock expenses through
early 2005 (see Note 6 to the financial statements).
We believe that our existing cash and short-term investments and
cash flow from operations will be sufficient to meet our existing
liquidity needs for the operations of the business. We also
believe that our existing cash and short-term investments and the
options offered by the Bank Facility, Finance Facility and GE
term loan, in addition to our cash flow from operations, will be
sufficient to complete our identified growth plans. If our plans
or assumptions change or prove to be inaccurate or if we make any
additional acquisitions of existing vessels or other businesses,
we may need to raise additional capital. We may not be able to
raise these additional funds, or we may not be able to raise such
funds on favorable terms.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Asset Retirement Obligations," effective for
fiscal years beginning after June 15, 2002. This statement
requires us to record the fair value of liabilities related to
future asset retirement obligations in the period the obligation
is incurred. We adopted SFAS No. 143 on January 1, 2003, which
did not impact our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections," which revises current guidance with
respect to gains and losses on early extinguishment of debt.
Under SFAS No. 145, gains and losses on early extinguishment of
debt are not treated as extraordinary items unless they meet the
criteria for extraordinary treatment in Accounting Principles
Board (APB) Opinion No. 30. We adopted SFAS No. 145 effective
January 1, 2003, and as a result, will be required to reclassify
the extraordinary losses on early extinguishment of debt from
prior periods in future filings as these amounts will no longer
qualify for extraordinary treatment under SFAS No. 145.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an
Amendment of SFAS No. 123," which provides alternative methods of
transition for a voluntary change to the fair-value based method
of accounting for stock-based employee compensation, and the new
standard, which is now effective, amends certain disclosure
requirements. We continue to apply APB No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in
accounting for our stock-based compensation; therefore, the
alternative methods of transition do not apply. We have adopted
the disclosure requirements of SFAS No. 148 (see Note 4 to the
financial statements.)
In June 2001, the American Institute of Certified Public
Accountants (AICPA) issued an exposure draft of a proposed
Statement of Position (SOP), "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment." This
proposed SOP would change, among other things, the method by
which companies would account for normal, recurring or periodic
repairs and maintenance costs related to "in service" fixed
assets. It would require that these types of expenses be
recognized when incurred rather than recognizing expense for
these costs while the asset is productive. The proposed SOP is
still under consideration, and uncertainties currently exist with
respect to the ultimate timing of its release and its final
scope. We are assessing the impact of the change should this SOP,
or any portion of this SOP, be adopted and will continue to
monitor the progress of this proposed standard. If the portion of
this SOP relating to planned major maintenance activities is
adopted, we would be required to expense regulatory maintenance
cost on our vessels as incurred (currently capitalized and
recognized as "drydocking cost amortization"), and capitalized
costs at the date of adoption would be charged to operations as a
cumulative effect of change in accounting principle.
Significant Accounting Policies and Estimates.
For a discussion of significant accounting policies and
estimates, see our Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate Risk. We are subject to market risk exposure
related to changes in interest rates on our Bank Facility (when
drawn upon), our Finance Facility and our term loan with GE.
Interest on borrowings under the Bank Facility accrue at a
variable rate, using LIBOR plus a range of 1.75% to 2.25%,
depending upon the level of our consolidated leverage ratio (as
defined) measured on a quarterly basis. Under the Financing
Facility, the interest rate during the construction financing
phase will be based upon our consolidated leverage ratio and
ranges from LIBOR plus a range of 3.00% to 3.50% based upon these
levels. The term facility of the Financing Facility is priced at
3.25% over LIBOR. Our term loan with GE includes an interest rate
consisting of the 30-day commercial paper rate plus 2.03%. We do
not have any interest rate swap agreements in place to manage our
interest rate risk.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our chief
executive officer and chief financial officer, with the
participation of management, have evaluated the effectiveness of
our "disclosure controls and procedures" (as defined in Rules 13a-
14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as
of a date within 90 days prior to the filing of this quarterly
report on Form 10-Q. Based on their evaluation, they have
concluded that our disclosure controls and procedures are
effective in alerting them in a timely manner to material
information relating to Torch Offshore, Inc. required to be
disclosed in our periodic Securities and Exchange Commission
filings under the Securities Exchange Act of 1934.
Changes in Internal Controls. There were no significant changes
in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the
date of their evaluation, including any corrective actions taken
with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in legal proceedings arising in the ordinary
course of business. Although we cannot give you any assurance
with respect to the ultimate outcome of such legal actions, in
our opinion these matters will not have a material adverse effect
on our financial position or results of operations.
We have been named as a defendant in a stockholder class action
suit filed by purported stockholders regarding our initial public
offering. This lawsuit, Karl L. Kapps, et. al. v. Torch Offshore,
Inc. et. al., No. 02-00582, which seeks unspecified monetary
damages, was filed on March 1, 2002 in U.S. District Court for
the Eastern District of Louisiana. The lawsuit was dismissed on
December 19, 2002 for failure to state a claim upon which relief
could be granted. The plaintiff has appealed to the U.S. Court of
Appeals for the Fifth Circuit. We believe the allegations in this
lawsuit are without merit and we intend to continue to vigorously
defend this lawsuit. Even so, an adverse outcome in this class
action litigation could have a material adverse effect on our
financial condition or results of operations.
We have been named as a defendant in a lawsuit (Bluffview
Capital, LP v. Torch Offshore, Inc., No. 2002-7662, filed in the
134th Judicial District Court, Dallas County, Texas on August 26,
2002) brought by a former service provider. The plaintiff was
originally hired to assist us in obtaining financing, among other
services. We terminated the relationship and are disputing the
plaintiff's interpretation of certain provisions regarding the
services to be provided and the calculation of fees allegedly
earned. It is our position that we have complied with all of the
provisions of the contract and we intend to continue to
vigorously defend our position in this matter. Nevertheless, an
adverse outcome in the litigation could have an adverse effect on
our results of operations.
We terminated our charter of the Midnight Hunter on January 24,
2003, as, among other things, the vessel did not meet certain
specifications as outlined in the charter agreement and this
prevented us from performing some types of work. We filed a
lawsuit (Torch Offshore, L.L.C. v. The M/V Midnight Hunter and
Cable Shipping, Inc., et al., No. 03-0343, filed in the United
States District Court, Eastern District of Louisiana on February
4, 2003) seeking an order, which was granted by the court,
attaching and arresting the Midnight Hunter as security for our
claims related to such termination. A $1.5 million standby letter
of credit issued to secure our payments under the charter remains
outstanding. The claims will be settled by arbitration in London,
England. Management believes the amount of the claim is justified
and we intend to vigorously pursue this matter. Nevertheless, an
adverse outcome from the litigation/arbitration could have an
adverse effect on our results of operations.
We filed a lawsuit (Torch Offshore, Inc. v. Newfield Exploration
Company, No. 03-0735, filed in the United States District Court,
Eastern District of Louisiana on March 13, 2003) against Newfield
Exploration Company (Newfield) claiming damages of approximately
$2.1 million related to work completed for Newfield in the Gulf
of Mexico at Grand Isle Block 103-A. Our lawsuit alleges that we
did not receive all compensation to which we were entitled
pursuant to the contract. As of March 31, 2003, we have recorded
an amount attributable to this claim based upon our contractual
rights under our agreement with Newfield. We intend to vigorously
pursue this matter, the ultimate resolution of which could
materially impact currently recorded amounts in the future.
Item 2. Changes in Securities and Use of Proceeds.
The information on the use of proceeds from our Public Offering
required by this item is set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" in Part I of this report, which
section is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed as part of this report are listed below.
Exhibit 99.1 Certification by Lyle G. Stockstill
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification by Robert E. Fulton
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TORCH OFFSHORE, INC.
Date: May 9, 2003 By: /s/ ROBERT E. FULTON
-----------------------
Robert E. Fulton
Chief Financial Officer
(Principal Accounting and
Financial Officer)
CERTIFICATIONS
I, Lyle G. Stockstill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a)designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b)evaluated the effectiveness of the registrant's disclosure
controls and procedures based on the evaluation as of a date
within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
(c)presented in this quarterly report their conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
(a)all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b)any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 /s/ LYLE G. STOCKSTILL
----------------------
Lyle G. Stockstill
Chairman of the Board and Chief
Executive Officer
I, Robert E. Fulton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Torch
Offshore, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a)designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b)evaluated the effectiveness of the registrant's disclosure
controls and procedures based on the evaluation as of a date
within 90 days prior to the filing date of this quarterly
report(the "Evaluation Date"); and
(c)presented in this quarterly report their conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
(a)all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b)any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 /s/ ROBERT E. FULTON
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Robert E. Fulton
Chief Financial Officer
EXHIBIT INDEX
99.1 -- Certification by Lyle G. Stockstill Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 -- Certification by Robert E. Fulton Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.1
CERTIFICATION BY LYLE G. STOCKSTILL PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending March 31, 2003
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Lyle G. Stockstill, Chairman of the
Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ LYLE G. STOCKSTILL
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Lyle G. Stockstill
Chairman of the Board and Chief Executive Officer
Exhibit 99.2
CERTIFICATION BY ROBERT E. FULTON PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report of Torch Offshore, Inc.
(the "Company") on Form 10-Q for the period ending March 31, 2003
as filed with the Securities and Exchange Commission of the date
hereof (the "Report"), I, Robert E. Fulton, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ ROBERT E. FULTON
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Robert E. Fulton
Chief Financial Officer